Payroll Tax Cut May Hurt Homebuyers

By Kelli B. Grant

Consumers currently shopping for a mortgage may find that last year’s extension of the payroll tax cut hurts, rather than helps, their finances.

The two-month, 2% cut could keep up to $367 in consumers’ paychecks, depending on their income; or $2,202 if Congress extends it through 2012 as expected. But soon-to-be-homeowners could be on the hook for much more as lenders begin to work in an extra 0.10% fee on Fannie Mae- and Freddie Mac-backed loans, meant to help fund the cut. CBS, which recently investigated the new charge, estimates it could add $15 a month to a $200,000 mortgage, for an extra $5,400 total over the life of a 30-year loan.

That’s not pocket change, but the fee isn’t particularly burdensome either, considering that mortgage rates are currently near record lows, says Keith Gumbinger, vice president at mortgage data firm HSH Associates. “It’s probably the least-painful time in mortgage history for this to happen,” he says. According to HSH, a 30-year fixed-rate mortgage currently averages 4.18%, down from 4.28% last week. 15-year loans are 3.46%, down from 3.55% last week. And it’s likely those borrowers will be able to write off some or all of the cost of the fee on their tax returns in future years, says Abe Schneier of the American Institute of Certified Public Accountants.

Consumers don’t have much leeway to avoid the fee. “If you’re going with FHA financing, you’re not going to have much of a choice,” Schneier says. Although it doesn’t take effect until April 1, consumers locking in a rate now for the next 60 days are likely to see it in estimates. Banks don’t often sell jumbo and adjustable-rate mortgages to Fannie and Freddie – so they may not be subject to the fee — but costs for those products tend to be higher over the life of the loan, Gumbinger says. The same holds true for Federal Housing Administration loans. “You may avoid that particular fee, but you don’t avoid the [overall higher] cost,” he says. Avoiding the charge may become more important down the line if mortgage rates rise or Congress decides to increase the fee, but for now, he says, the best savings advice is still to shop around for the best rate.